Chip makers NXP Semiconductors Freescale Semiconductor are to merge, creating a US$40 billion company that, they say, leads the market in automotive chips and general-purpose microcontrollers.

Chip makers NXP Semiconductors Freescale Semiconductor are to merge, creating a US$40 billion company that, they say, leads the market in automotive chips and general-purpose microcontrollers.

The combined entity will have revenue of over $10 billion, much of it from microcontrollers and chips for cars, the companies said. As mobile phone and automobile manufacturers join forces to bring more intelligence to vehicles, and as the market for wearables and other small connected devices takes off, these markets are likely to see strong growth.

Like other chip companies, NXP and Freescale seem to be betting big on the so-called Internet of Things (IoT), a push from many tech companies to get as many devices connected to the Internet as possible. With predictions of billions of new devices getting connected to the Internet over the coming years, it could be a very lucrative market for chip makers.

The deal, described by NXP and Freescale as a definitive agreement, has still to be approved by their shareholders and several regulators. The companies expect it to close in the second half of this year. Freescale shareholders will receive $6.25 in cash and 0.3521 NXP shares for each Freescale share, valuing the company at around $11.8 billion.